Figure: Aggregate Expenditures I
Look at the figure Aggregate Expenditures I. When real GDP is $700 billion, there will
be a _____ in unplanned inventory investment.
A) $125 million increase
B) $125 million decline
C) $200 million decline
D) $200 million increase
After establishment of the Federal Reserve in 1913, there were no more bank runs.
A) True
B) False
Ireland’s rapid growth came to a halt in 2008 because:
A) the potato crop was destroyed by bad weather.
B) the central bank of Ireland refused to accept the euro.
C) of a real estate bubble.
D) of the failures of many shipping companies.
A devaluation can help reduce:
I. shortages of domestic currency.
II. surpluses of domestic currency.
A) I only
B) II only
C) I and II
D) neither I nor II
Look at the table Wheat and Aluminum. The United States and Germany can produce
both wheat and aluminum. The table shows the maximum annual output combinations
of wheat and aluminum that can be produced. Based on the table:
A) the United States has a comparative advantage in wheat and an absolute advantage
in wheat.
B) Germany has an absolute advantage in aluminum and a comparative advantage in
wheat.
C) the United States has a comparative advantage in both aluminum and wheat.
D) Germany has a comparative advantage in aluminum and an absolute advantage in
aluminum.
Assume that an economy is open to capital inflows and that the inflows are equal to
imports minus exports (IM ” X). Answer the following questions.
a. Budget balance = “$20; X = $60; IM = $90; Private saving = $150. Calculate
investment spending.
b. Private saving = $200; Investment = $220; Budget balance = “$30. Calculate (IM ”
X).
The purpose of the local clearinghouses established by banks in the early 1900s was to:
A) merge failing banks with healthy ones.
B) facilitate the transfer of electronic funds between member banks.
C) pool resources of several local banks so that the clearinghouse could guarantee a
member’s deposits in case of a bank run.
D) help people who were unemployed find jobs.
Table: Real and Nominal Output
Look at the table Real and Nominal Output. Nominal output in year 4 is:
A) $70.
B) $120.
C) $140.
D) $280.
Look at the figure Wine and Wheat. If this economy is producing at point A, we know
the economy is:
A) using its resources efficiently.
B) using its resources inefficiently.
C) producing at an unattainable point.
D) trading with another country.
An illiquid asset:
A) cannot be sold.
B) provides the owner no return or income.
C) is a tangible asset.
D) cannot quickly be converted into cash with little loss of value.
Along a Phillips curve:
A) consumption depends on prices.
B) the inflation rate varies inversely with the unemployment rate.
C) the inflation rate varies directly with the unemployment rate.
D) prices and tax rates are directly related.
An increase in the money supply _____ the interest rate in the short run but _____ the
interest rate in the long run.
A) lowers; does not affect
B) raises; lowers
C) does not affect; raises
D) does not affect; lowers
Autonomous spending is an initial change in the desired level of spending by firms,
households, or government at a given level of real GDP.
A) True
B) False
Classical economists focused on short-run effects of monetary policy.
A) True
B) False
Figure: Shift of the Aggregate Demand Curve
Look at the figure Shift of the Aggregate Demand Curve. A movement from point C on
AD2 to point A on AD1 may have been the result of:
A) an increase in investment spending following optimistic GDP forecasts.
B) a decrease in investment spending following pessimistic GDP forecasts.
C) decreases in the taxes paid by businesses.
D) lower interest rates.
Scenario: The Quantity Theory of Money
Suppose the money supply is equal to $10 billion and the velocity of money is 6.
Look at the scenario The Quantity Theory of Money. If the aggregate price level is 4,
then the nominal GDP is:
A) $15 billion.
B) $60 billion.
C) $20 billion.
D) $10 billion.
High rates of inflation often result in people spending inordinate amounts of time trying
to make transactions and finding ways to keep the real value of their money from
decreasing. This is an example of _____ costs.
A) shoe-leather
B) menu
C) efficiency wage
D) unit-of-account
Figure: AD”AS
Look at the figure AD”AS. Assume that the economy is in long-run equilibrium. If the
Federal Reserve lowers the key interest rate:
A) the aggregate demand curve will shift to AD2.
B) the aggregate demand curve will stay unchanged at AD1.
C) there will be a downward movement along the aggregate demand curve AD1.
D) the aggregate demand curve will shift to AD3.
Real GDP equals $200 billion, the government collects 20% of any increase in real
GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential
output equals $255.6 billion, the government could close the _____ gap by increasing
government spending by _____.
A) recessionary; $20 billion
B) recessionary; $55.6 billion
C) inflationary; $20 billion
D) inflationary; $55.6 billion
The interest rate effect of a change in the aggregate price level occurs when:
A) a higher price level decreases the purchasing power of money, resulting in an
increase in the interest rate.
B) the Fed uses contractionary monetary policy, causing an increase in the interest rate.
C) government borrowing in the loanable funds market raises the interest rate.
D) the price of a bond increases, reducing the interest rate.
Which of the following accurately describes disinflation?
A) It must be accompanied by a decline in the price level.
B) The inflation rate rises at a higher rate.
C) It is reduction of the inflation that has become embedded in expectations.
D) It is a gradual reduction in the price level over time.
Many economists agree that environmental damage from economic growth:
A) is minimal and not serious enough to address through economic channels.
B) occurs but can be contained with market-based incentives and concerted government
action.
C) results in a lack of growth in some countries.
D) occurs only in poorer countries.
The opportunity cost of something is:
A) greater during periods of rising prices.
B) equal to the money cost.
C) less during periods of falling prices.
D) what is given up to acquire it.
The aggregate demand curve slopes:
A) downward for the same reasons that an ordinary demand curve does.
B) downward in part because when the price level falls, the real wealth of the public
falls, and this induces people to change their consumption.
C) downward in part because as the price level falls, the ability of households and firms
to borrow cheaply increases.
D) upward, unlike an ordinary demand curve.
_____ was a _____ economist who believed that _____ in wages and prices could block
adjustments to full employment.
A) Adam Smith; British; flexibility
B) Milton Friedman; U.S.; inflexibility
C) John Maynard Keynes; British; stickiness
D) Robert Lucas; U.S.; stickiness
Unemployment rates tend to decrease when:
A) the economy expands.
B) discouraged workers become active job seekers.
C) underemployed workers become unemployed.
D) the economy contracts.
In a liquidity trap:
A) using expansionary monetary policy is not effective because the real interest rate is
negative.
B) aggregate demand falls because consumers do not have enough liquidity to consume.
C) using expansionary monetary policy is not effective because the nominal interest rate
is irreducible.
D) lenders are trapped by large loans with declining rates of return.
An automatic stabilizer that works when the economy contracts is:
A) a rise in tax receipts.
B) a fall in government purchases.
C) a discretionary decrease in government purchases.
D) a rise in government transfers as more people receive unemployment insurance
benefits.
If the government increases the length and amount of unemployment benefits, the
unemployment rate will fall.
A) True
B) False
According to the savings”investment spending identity:
A) savings and investment spending are always equal for the economy as a whole.
B) for long-run economic growth savings must be more than investment spending.
C) for long-run economic growth savings must be less than investment spending.
D) the identity of savers and investors is important for encouraging long-run economic
growth.
Assuming that desktop computers are normal goods, which of the following will NOT
increase demand for desktop computers?
A) an increase in the incomes of computer users
B) cool new computer games that can only be played on desktop computers
C) a very large computer company going out of business
D) the price of notebook computers increasing